Don't Bet Against JPMorgan

NEW YORK (TheStreet) -- Warren Buffett once said, "It takes 20 years to build a reputation and 5 seconds to ruin it. If you think about that, you'll do things differently."

It's no glowing endorsement to regard JPMorgan Chase (JPM) as the cleanest shirt in a dirty hamper. Yet I always regard that as an appropriate label, given the list of the villains that created the financial crisis. Today, however, that sentiment changed. Where do we begin?

It would be a gross understatement to say that the now infamous "London Whale" trade, which saw the bank lose more than $6 billion in complicated maneuvers, has knocked some shine off JPMorgan's armor. Criminal indictments have been filed against two former traders accused of attempting to cover up the losses and JPMorgan has been implicated for what regulators consider "manipulative market practices."

The bank opted to settle these charges for $13 billion, which includes no admission of wrongdoing. Still, given the strength of the bank's balance sheet and its deep pockets, I do question why JPMorgan resisted the fight. Not to mention, the settlement, which still leaves the door open for other criminal cases, does not release JPMorgan or any individuals from further prosecution related to the mortgage scandal.


Last week we learned that the bank's main subsidiary entered into a deferred prosecution agreement for its role in the Madoff affair, which led to an estimated $18 billion in investor losses. (So I doubt anyone still regards Jamie Dimon as the "smartest guy in the room," much less the industry's best manager.)

All told, after spending much of 2013 dusting stains off its image, JPMorgan has a laundry list of reparations to account for before regaining consumers' trust. Investors, on the other hand, weren't swayed by these distractions, given the bank's impressive 2013 stock gains of 36%, which bested Citigroup (C) and matched the strong performance of Wells Fargo (WFC).

Wall Street will conveniently adopt a very short memory as long as companies apologize with higher revenue and profits. In that regard, JPMorgan apologized as well as anyone. With fourth-quarter earnings results due out Tuesday, the bank will look to end the year in the Street's good graces and begin its cleansing by posting strong results and improved guidance.

The Street will be looking for $1.33 in earnings per share on revenue of $23.8 billion, which would represent a 2.3% year-over-year revenue decline. When compared to the 6% decline in Wells Fargo's results, it seems the Street is a bit more optimistic about JPMorgan. With JPMorgan producing fee income growth of more than 30%, there is still plenty to love with this business.

Compared to Bank of America (BAC), an argument can be made that these shares are still undervalued. There are very few banks that can match JPMorgan's performance in terms of profitability and credit quality. I'm not suggesting that the risks should be ignored. The manner in which the bank has been able to overcome its operational deficits has been nonetheless impressive.

From a PR perspective, the bank can't go anywhere but up. While management has been saying and doing all of the right things, I still believe it will still take some time for the bank to regain some of that lost trust and rebuild its reputation with consumers.

From an investment perspective, however, to the extent that the JPMorgan can show growth in key areas such as mortgage loan origination and overall loan growth, this will certainly force the Street's hand to forgive the bank much sooner than it otherwise would have wanted. And given JPMorgan's strong track record on returns on equity, profitability and credit quality, this is one name I would not want to bet against.

I suppose some reputation still remains.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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